Strait of Hormuz Risk Premium: Uncertainty as an Asset Class

By the Curmudgeon with Victor Sperandeo

Geopolitical Overview:

Earlier this week, U.S. forces executed over 300 strikes on Iranian military assets (see map below)—degrading naval, aerospace, and logistical infrastructure—and enforced a naval blockade restricting traffic to/from Iranian sea ports. Iran has responded by launching drones and missiles at U.S. regional bases and its allies in Jordan and Kuwait.

Despite Iranian retaliation, Tehran has avoided escalating the conflict to major energy infrastructure, mitigating broader supply shocks. Iran has also released a U.S. citizen -Dena Karari- who had been detained via an exit ban for 566 days. That might be perceived as an “olive-branch” gesture from the Islamic Republic.

U.S. reinstatement of a strict naval blockade enforces restricted port access for Iran, while formal transit avenues for neutral commercial shipping remain open. Yet degrading Iranian military capabilities does not equate to compelling Tehran to accept U.S. terms to end the conflict. While Washington can suppress Iran’s capacity for direct maritime disruption, guaranteeing commercial stability without a prolonged campaign remains unfeasible. Consequently, Iran's ability to sustain systemic uncertainty limits U.S. leverage and prevents a decisive political victory.

Sustained conflict in the Persian Gulf threatens roughly 20% of global oil transit, creating supply chain bottlenecks that drive up shipping and insurance premiums. Disrupted trade flows inflate energy and commodity costs worldwide, forcing major shipping conglomerates to route vessels around the Cape of Good Hope, which severely strains global vessel capacity.

Rather than capitulating to Washington, Tehran can leverage the macroeconomic fallout of these supply constraints. By enduring a prolonged campaign, Iran retains enough asymmetric leverage to deny the U.S. a clean political or economic resolution.

Image Credit: Geopolitical Futures

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U.S. Energy Secretary Chris Wright stated in a Sunday interview that the United States is dedicated to assuring the flow of commercial traffic through the Strait of Hormuz, though diplomatic off-ramps remain an option if Iran is willing to negotiate.

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Victor on the U.S. - Iran War:

Some prominent oil analysts say the U.S. attack on Iran is one of the greatest blunders of all time. Certainly, it is the worst political calculation since Vietnam. It will cost the Republican party power and much more … a loss of TRUST!

In my opinion, this war cannot be won without U.S. boots on the ground. The number of U.S. troops the Generals say will be needed for armed combat will surely be under-estimated. Based on my research of past wars, 50% of the U.S. armed forces would die trying to take the Strait, as there is no place to hide once they reach the beach. That is why the U.S. military has not dared try a land invasion….as some naïve observers say, "to finish the job.”

-->Do not forget that Election Day is only 106 days from Monday July 20^th. I expect the GOP to lose seats due to this war, especially in the House of Representatives where they can afford to lose only two seats to retain their majority.

-->Please see my observations and thoughts on the Energy Markets, Conclusions, and Addendum below.

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Economic and Market Impact:

The resumption of the U.S.–Iran confrontation (post MOU) is more than a war. It is also a pricing mechanism for global risk assets. If Iran expands targeting to Saudi, Emirati, or Qatari infrastructure—whether via proxies, missiles, or cyber-physical attacks—the risk premium shifts from commodity pricing into sovereign and credit markets.

Sovereign wealth flows, which have been a stabilizing force in global equities and private markets, could become more cautious, more regional, or temporarily impaired.

Despite extensive U.S. strikes degrading Iranian capabilities, markets are not responding to the battlefield. They are responding to uncertainty. It’s uncertainty, not destruction, that drives capital flows, insurance premiums, and commodity pricing.

The Strait of Hormuz remains functional—but not a reliable conduit for shipping. That distinction matters. Oil does not need to stop flowing to move prices higher. It only needs to be perceived as intermittently vulnerable. A single successful disruption can reset risk models across energy, shipping, and insurance markets.

As a result, even low-frequency attacks can sustain a structural premium in crude and (especially) refined product pricing.

This creates a classic conundrum: The U.S. must conduct continuous air strikes to suppress volatility while Iran only needs episodic retaliation to reintroduce it.

Oil Market Indicators Are Already Flashing Red:

The transmission channels are visible in real time:

· Brent crude oil structure has flipped from contango to backwardation, with the near month contract trading at an $8–9 premium to six-month-out futures—the largest spread since early June. This signals tight near-term physical availability and elevated geopolitical risk pricing.

· WTI crude oil trades around $81.77/barrel following recent tanker strikes and regional friction. Consensus baseline forecast averages $80–$87/barrel for late 2026.

· Asymmetric risk: If Tehran successfully enforces a prolonged blockade or severely degrades Strait of Hormuz transit, institutional modeling targets a sharp WTI surge above $100–$111/barrel.

· War-risk insurance premiums for Gulf transits have surged from a baseline of 0.1–0.25% of vessel value to 1–7.5%, with the most exposed routes seeing rates as high as 3–7.5% of hull value. For a $250 million VLCC, that translates into insurance costs jumping from roughly $600,000 to $7–9 million per voyage.

· Tanker freight rates have responded accordingly, with super max rates to Asia approaching two-month highs and daily hire rates increasing by $2,000+ in response to perceived risk.

· Middle East crude benchmarks (Oman, Dubai, Murban) have swung from discounts to premiums, confirming that supply concerns are being priced regionally, not just in benchmark Brent.

Victor on the Energy Markets:

The critical issue of the Iran war that most analyst miss is the misplaced focus on WTI crude oil futures rather than Brent spot oil, heating oil and diesel fuel.

The U.S. government manipulates WTI Crude Oil futures but not Heating oil. The U.S. still has crude in its “Strategic Petroleum Reserve (SPR)," so selling futures has no risk for the U.S. government which has oil it can deliver.

Note the difference in Heating oil vs. Crude Oil Futures prices:

· August Heating Oil Futures made a NEW HIGH on July 13th at $401.43 from the earlier high of $390.97 on May 19th $406.46). It's currently at $397.35.

· August Crude Oil Futures made a high on May 18th at $99.47, yet it's currently only $82.49!

Diesel fuel used in trucks and jet fuel used in airlines are derived from crude oil. It takes 3 barrels of crude oil to make 1 barrel of diesel fuel! Yet the U.S. has no stockpile of diesel fuel. Also, it takes a certain type of oil - "sour crude” that is specialized and complex to refine into diesel fuel.

The “crack spread," traded on the NYMEX, is the difference between the price of crude oil and the petroleum products extracted from it, serving as a proxy for an oil refiner's gross profit margin. It gets its name from the "cracking" process in which crude oil is broken down into refined products like gasoline and diesel. While the oil price has fallen, gasoline and diesel prices remain high.

As of July 2026, the benchmark NYMEX WTI 3-2-1 crack spread has soared to an unprecedented record high of $69.66 per barrel. This represents an astronomical rise from the 27% baseline seen at the start of the year, with refining margins now commanding 70% to 75% of the total value of a barrel of crude.

Rather than signaling a traditional consumer-led recession, this extreme "split decision" in the energy markets—where crude oil prices are modestly rising or stabilizing while consumer fuel prices remain stubbornly high—presents acute warning signs for the global economy. See Conclusions below for the details.

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Trigger-to-Impact Matrix: What Moves Markets

Trigger Event	Expected Brent Move	Insurance Rate Impact	Tanker Hire Impact
No additional incidents (status quo)	Flat to –$3 (premium compression)	Gradual normalization to 1–3%	Modest easing; freight rates drift lower
One additional vessel hit (non-critical)	+$5–8	Jump to 5–7.5% on exposed routes	+$2,000–4,000/day on key lanes
Multiple vessels hit in 30-day window	+$10–15	Rates toward 7.5–10%	Hire rates spike $5,000+/day due to scarcity
Attack on Gulf energy infrastructure (terminal, refinery, storage)	+$15–25+	10%+ on high-risk routes; capacity constraints	Severe tightening; rerouting premiums
Expansion to Bab el-Mandeb or Red Sea chokepoints	+$10–20 (global rerating)	Broad-based increase across Middle East/Red Sea	Global freight repricing; extended voyage times
Negotiated pause / measurable de-escalation	–$8–12 (sharp unwind)	Rapid compression toward 0.5–1%	Normalization; backwardation flattens

Credit: Table generated by Perplexity.ai

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Upside Energy Infrastructure Risks:

The real risk emerges if the U.S. conflict with Iran degrades into sustained infrastructure targeting or maritime insecurity. At that point, the correlation structure shifts: energy strength begins to signal economic stress rather than growth, credit spreads widen, and global cyclicals reprice lower.

Any credible threat to Gulf energy infrastructure or expansion to Bab el-Mandeb would trigger a nonlinear repricing: Brent could spike $15–25 higher, insurance rates could approach 10% of hull value on the most exposed routes, and global volatility indices would react sharply.

Downside Scenario:

A negotiated pause or measurable reduction in attack frequency would quickly deflate premiums. Energy markets are highly sensitive to stabilization signals, and positioning is light enough that a swift mean reversion is plausible.

The Bottom Line for Capital Flows:

· This is not a binary “win/lose” dynamic. It is a contest over exhaustion rates, expressed through markets.

· Iran aims to keep volatility alive long enough to extract concessions.

· The U.S. aims to compress volatility before the cost of doing so outweighs the benefit.

Conclusions:

For investors, the key is not who is “winning” militarily, but whether risk is expanding or declining at the margin.

The most likely near-term outcome is neither resolution nor normalization of the Iran conflict, but managed instability. A partial reduction in disruptions sufficient to ease acute pricing pressure, without eliminating the embedded risk premium.

Victor: the existential world problem of the Iran War is twofold:

1. Businesses use diesel fuel which is in short supply.

2. The storage of U.S. crude oil reserves is running out.

Also, the bottom of the barrel of U.S. oil reserves is ~15% of the total held in storage. It cannot be used to make refined products, as the oil at the bottom of the storage is sludge.

This portends Armageddon for food, fertilizer, helium and many more refined energy products that have to be delivered throughout the world. There is no substitute for those products which are essential for trucks, ships, and planes. Also note that the U.S. military has a priority claim on energy supplies.

The Fed can raise interest rates to 10%+ yet that would mean nothing for oil, diesel and gasoline prices, as the price of energy will be bid up by businesses as long as transit through the Strait is constrained.

What history shows is that the Fed can do whatever it wishes and find the applicable numbers to justify it. This allows appointed political bureaucrat bankers (FOMC members) to rule the U.S. economy and its citizens, not their Constitutionally elected representatives.

Curmudgeon:

· Energy markets will continue to trade with a geopolitical uncertainty risk premium.

· Shipping will remain frictional, with elevated insurance and freight costs.

· Volatility will stay structurally elevated, with episodic spikes on escalation headlines.

Markets are not waiting for a U.S.-Iran winner. They are pricing in the persistence of risk.

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End Quote:

An age-old recurring problem, but this one is unique:

“The cycles of shortage and surplus characterize the entire history of oil.” Daniel Yergen, Global Energy expert.

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Addendum - Victor on the Markets:

· Gold is making a low. It certainly can go to $3,800/ounce, or even $3500, but that would be unlikely.

· I suggest buying a small 5-10% Gold position here with the intent of going to 20-25% later.

· Stocks are topping, but no shorting, as Trump is the guardian angel of the stock markets for his political propaganda.

· U.S. Treasury Bonds and Notes have made their lows.

· No increase in the Fed Funds rates is currently in the cards.

· Commodities X-Oil are in a downtrend. Example: After Kroger’s and Walmart cut food and meat prices, August Live CATTLE futures dropped 10% in a straight line decline over 20 days.

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Wishing you good health, success and good luck. Till next time.....................

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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